The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

Over the past hundred or so years, there's been a global movement toward free trade. A simple search on Wikipedia shows dozens and dozens of bilateral and multilateral trade agreements that nations have entered into since the Second World War. The trend is clear--we're moving toward a world without taxes on imports; that is, a world without tariffs. There's an emerging threat to this progress, though, and it's showing up in a very unlikely place.

Tariffs As Taxes

Tariffs are taxes. When an import crosses a border and a payment is due to a government merely because the import is from another country, by definition the destination country is imposing a tax on that import. One can use any euphemism one wants--call it a tariff, a duty, a custom fee, etc. But it's an import tax, plain and simple.

This is why free market advocates are for free trade. If you tax something, you get less of it. The reverse is also true. Lowering taxes on imports means that global free trade increases. A country which is not very good at making hammers but is great at making nails can trade with another country which has the opposite productive capacities. Each country is better off, and total productivity increases (even if there are temporary transition costs for the laggard industries). Governments should get out of the way and let this global settling-out process happen with as few impediments as possible.

Traditional import taxes aren't as easy to impose as before. Thanks to nearly-universal membership in the World Trade Organization (WTO), it's difficult for a country to simply slap up a protective tariff in order to shelter a domestic industry from the rigors of global competition.

There have been signs in recent times that a few countries are experimenting with a new kind of backdoor tariff, one which skirts trade law by creating de facto tariffs in patent laws instead.

Over the past few years, the governments of France, Taiwan, Japan, and Korea have appropriated significant funds for the purpose of creating Government Sponsored Patent Pools (“GSPPs”). Although these entities claim to have been initially established to foster domestic innovation and growth through the aggregation of intellectual property, some have evolved into government sponsored patent trolls by engaging in anti-competitive protectionist behavior, such as filing lawsuits targeting foreign companies and granting special privileges to domestic companies.

GSPPs receive substantial government resources to support domestic manufacturers of high-tech products. Utilizing government funding, GSPPs purchase patents, both domestic and foreign, and license them to domestic companies at low costs. GSPPs also enter into licensing agreements with domestic patent-holders to manage their patents. In addition, some GSPPs have begun to bring patent infringement actions against foreign entities, frequently targeting competitors of domestic companies. GSPPs also provide defensive litigation support to domestic companies, making available “counterclaim funds” and licensing patents for domestic entities to bring counterclaims against foreign companies. Additionally, GSPPs transfer revenue they receive from foreign companies through settlement and court-awarded damages to domestic companies and industries.

France Brevets, a French GSPP, asserts on its website that it employs “legal resources” to help French companies “monetize” patents and to “capture” their “full value,” and that one of its “goal[s] is to maximize the revenues to refinance R&D in France.” Industrial Technology Research Institute, a Taiwanese GSPP, states on its website that “aggressive patent enforcement” is one of the services it provides, and explains that it actively enforces against infringing parties and assists domestic companies in the negotiation and litigation process.

Although many claim to be defensive in nature, some GSPPs are using U.S. courts and the United States International Trade Commission to pursue claims against foreign entities. For example, in August 2013, France Brevets filed lawsuits against LG Electronics of Korea and HTC Corporation of Taiwan in both the U.S. and Germany, alleging infringement of two patents that it holds. Both patents at issue were initially granted to Inside Secure, a French-based chip supplier, and then subsequently assigned to France Brevets. In discussing the litigation, France Brevets’ managing director Jean Charles Hourcade explained, “while our general philosophy is to act transparently . . . we are also determined to take other steps when [licensing] discussions with foreign companies are not conclusive.”

ITRI has also pursued a litigation strategy intended to target foreign competitors of Taiwanese companies. Since 2009, ITRI has initiated more than 15 patent infringement suits against foreign companies (for example LG and Samsung) in U.S. District Courts, along with two infringement suits at the ITC. The suits have claimed infringement of products that directly compete with HTC, a Taiwanese technology company.

A Dangerous New Precedent

These experiments in using bogus patent royalty claims as a proxy for a new round of protective tariffs are troubling, to say the least. For generations, free market supporters have worked tirelessly to advance the free trade agenda and create a global marketplace in which everyone is wealthier over time. Should countries be able to sidestep the tariff-abolition trend with impunity, all of this progress will be reversed. Patent law will simply be a new tariff regime just as stifling as the old one.